New responsibilities for PRNs

How will the revised regulations on packaging waste impact on industry? Angus McPherson of the Environment Exchange looks at the issues.

In 2006 a new revised version of the Producer Responsibility Obligations (Packaging Waste) Regulations 1997 will be introduced with new targets and an expansion of those companies on whom the legislation will impact. But before considering the revised regulations, many imponderables continue to exist as the end of the 2005 compliance year approaches.

Firstly the consequences of non-compliance have still to be established. Last year six compliance schemes and 34 companies failed to acquire sufficient evidence to meet their obligation. It is not clear if this was insufficient evidence or solely that evidence in the wrong material was presented.

There are rumours that some have been found guilty of an offence and others have been sent warning letters but to date no clear indication of a deterrent to non-compliance or a consistency of approach.

Some are beginning to advocate the benefits of a 'penalty PRN' as a swift and simple fine. As yet neither the optimum route of returning funds into the recycling industry nor the fairest level for the penalty has been identified.

An alternative is to allow a matching level of carry back as carry forward between compliance years and a rolling fine until compliance is achieved.

Secondly there are on-going suggestions of fraud. There has been one successful prosecution by the Agencies for the issuing of fraudulent PRNs.

Nevertheless there are still doubts that all PRNs and particularly PERNs truly represent the recycling of packaging. It must be emphasised that this is not a detraction of the PRN system; in fact to the contrary the existence of the PRN system has highlighted the problem.

The true problems lie within the recycling industry as it becomes more global to successfully identify the composition and quality of its secondary raw materials. At the best of times it is difficult to identify packaging in a semi-segregated waste stream and the complexity of this task is multiplied when mixed loads are sent overseas for separation as well as processing.

While nothing will prevent fraud, the introduction of a three tier accreditation system of a sampling and inspection plan, independent audit by a Chartered Auditor and Agency approval will undoubtedly make it a great deal more difficult. It will be interesting to see what if anything the BBC 1 programme Real Story uncover.

Thirdly the huge rise in the price of metals PRNs in 2006 has stimulated concerns that some elements of the market are deliberately preventing other elements of the market from complying. This has gained momentum as availability was withheld from the open market during the transition period between 2004 and 2005.

In hindsight it may become clear that some of the non-compliance issues came about not because the PRNs were not potentially available but because they had been carried forward into the next compliance year. While this may have happened in error in one year, it should not occur two years in a row.

The introduction of an electronic PRN and PERN register would allow regulators and the market to identify at an early stage both potential fraud and bottlenecks.

The reliance of the UK on export markets to meet its obligation has highlighted another issue. Europe and the UK have set the material specific recycling targets challengingly high on the presumption that each of the recycling industries needs to be incentivised by discrete targets higher than what they currently achieve.

But the overall requirement of the legislation is to raise the level of recycling of packaging regardless of material type. As a result PRN prices no longer compete between materials in the general recycling market as they do in the packaging market but instead are significantly influenced by the decisions of a very small number of market participants.

If a large buyer takes a decision to push the prices of PRNs down then a potential shortfall is created and open market prices escalate rapidly. If a seller is reliant on export markets which are tight then the open market price escalates as we have seen in steel but if exporting is successful then the market is over-supplied and the market price is deflated.

In consequence the cost of compliance is most probably higher without any major shift in the overall composition of packaging activity and a significant reduction in flexibility.

Although the UK has seen an overall increase in recycling activity, export markets are no respecters of calendar years and two bad export quarters in a material create a crisis in that material while significant surpluses in other materials cannot be utilised to meet the overall recycling requirement.

As a result high material specific targets which were introduced with the best of intentions have additionally increased the year on year volatility of the PRN market.

The volatility of the PRN market, which makes budgeting difficult, has been a source of considerable concern to all involved. While it is inevitable that PRN prices will move to reflect supply or demand the degree of movement has been made worse by the reluctance of many participants in the market to fix both volumes and prices to a forward delivery date.

Buyers always presume that prices will go down while sellers advocate that prices will rise. This reluctance translates to resistance to fix contracts forward in the open markets which further increases the volatility of the spot market both because volume availability is deprived from the spot market by the bi-lateral contracts which in turn are trying to price against the open market price which is reactive to the availability.

If only 10% of the total market is traded through spot market and the total market is 2% either over or under supplied, then the spot market becomes 20% (2% is 20% of 10%) over or under supplied with an exponential consequence on the price.

Similarly if the spot market is viewed as the trading facility of last resort it is inevitable that volatility will increase as distressed buyers and sellers arrive at the market at year end having excited the wider market while exhausting all other avenues.

Finally the spot market caters for both small and large buyers and sellers with a wide range of buying and selling strategies while forward markets are focused on volume buyers and sellers wishing to mitigate their risks.

So how have prices fared in the 2005 PRN market? Initially there were concerns whether aluminium, plastic and steel material specific targets could be met. Investigations in wood and plastic gave rise to fears that PRNs in these materials might be in short supply.

As a result prices opened and have remained about 50% higher than in 2004. Prices drifted up to August but softened when quarter two figures allayed initial concerns. Paper exporters had not only successfully absorbed stock surpluses that resulted from the closure of BPB in Aberdeen but also expanded sufficiently to counter the reduction in wood PRNs.

In steel and aluminium anticipated shortages have been exacerbated by difficulties in export markets. Although there was a rapid increase in activity in the third quarter achieving the targets still look challenging.

Consequently PRNs are trading at premium prices as demand remains strong and availability scare. In contrast the glass and plastic markets have both softened towards general recycling prices as fears about potential difficulties in meeting material specific targets declined as long awaited glass reprocessing came on line at Rockware and exports continued to grow from the peaks of the fourth quarter in 2004.

What does 2006 hold? Although as yet the amended regulations are not publicly available some changes are widely predicted. Obligations will now come on leased packaging and packaging used by franchises. This is anticipated to increase the national obligation by some 300,000 tonnes particularly in wood, glass and paper.

This level of increase is greeted with caution by many data gathers. As a result the targets for 2006 onwards have been reduced in aluminium, paper, steel, wood and the general recycling element of the recovery obligation. In contrast obligations on glass, plastic and recovery have increased.

The requirement for an independent audit and the current DEFRA investigation into paper exports is anticipated to restrict PRN supply. The spectacular growth in plastic PRNs is very reliant on exports which may encounter the same challenges as the metals have this year, glass PRNs have to expand significantly to meet their new targets but have achieved rapid growth to date.

Equally it is far from clear that the metals sector is out of trouble. As a result prudent buyers are looking now to acquire PRNs at similar prices to this year in glass and plastic. The market may wait until the final figures are out for 2005 before agreeing significant volumes in the metals sector as many feel that the current prices are unnecessarily high. How much is ultimately available to be carried forward into 2006 will be a key here.

Although there is increased demand for recovery PRNs, this sector is currently oversupplied and it is difficult to see that there will be any change to their current administrative value. In contrast if DEFRA's predictions on increased obligations are overstated then the paper and wood markets could be trading at lower prices to 2005.

Consequently a significant divergence in prices between the PRNs that are struggling to meet their material specific targets and those that are meeting general recycling obligations may develop and the latter prices may move towards recovery ones. In turn this will increase the movement in prices when materials achieve their specific targets.

Looking further forward there are too many unknowns to judge the likely outcomes of the revised targets but so long as the export markets remain buoyant it should be a fair expectation that 2005 will be one of the most expensive years for compliance.